A bumpy road to recovery
Though indicators are still mixed, the US economy looks on track to begin its recovery in the second half of the year
In the very short run, many of our indicators, including the ISM purchasing managers survey and initial unemployment claims, will be driven by short-term issues in the auto industry. I expect that as these indicators bounce around, Wall Street will react accordingly. However, in the long term, an improving auto industry, a stabilising housing industry, inventory replenishment, and the stimulus bill could give the economy a better-than-expected lift through the middle of next year. At that point, my crystal ball becomes a little cloudier as there will be the potential for higher taxes and higher inflation to short circuit an otherwise improving economy.
Despite what I believed was a positive week for economic indicators, the Dow Jones Industrial Average was down almost 2% last week. Since the Dow peaked on June 12, it is down about 5%-6% after rising 39% from its March low. Given such a quick move in such a short time period, the Dow was probably a little ahead of itself. Furthermore, the major economic indicators moved from mostly positive and above expectations to a more mixed set of readings, and some major misses relative to expectations, over the last six weeks. In particular, the employment report, retail sales, and consumer confidence were not up to snuff, and the market reacted negatively.
Negative indicators have recently received a lot of attention (consumer confidence) while a greater number of positive indicators (initial claims, inventories) were ignored or explained away as temporary.
The most recent exciting number was initial unemployment claims, which fell to 565,000 for the week ending July 4. This was well below the expectation of 610,000 and the first time below 600,000 in some time. However, the Street was quick to note that this was a holiday-shortened week and seasonal adjustments for the auto industry may not have been perfect, and it largely ignored the positive news. While these factors did help, I believe that even a crudely adjusted claims number was likely to have fallen under the magical 600,000 level. Initial claims are one of the best early indicators of an economic turn. Given that it peaked back in early April, the unemployment claims number is my best evidence of an economic bottom.
The early read on consumer sentiment, as measured by the University of Michigan, was on the disappointing side of the ledger coming in at 64.6 versus expectations for a number in the low 70s and the prior month's reading of 70.8. I generally think of this as more of a coincident indicator, which often reflects stock market activity, but I still was sorry to see this one go the wrong way. Consumers need to let go of more of their hard-earned cash if we hope to get out of this recession.
Individual chain store sales were a mixed bag. On an absolute numbers basis, value-oriented retailers reported flat to up sales, while high-end retailers showed double-digit declines. That said, bigger department stores performed better than negative expectations.
Unfortunately bad weather has weighed on both retail sales and consumer sentiment. In the Upper Midwest and the Northeast of the United States, weather has been terrible, with cold temperatures, clouds, and rain depressing the sale of seasonal items ranging from swimsuits to patio gear. The one week temperatures did get above 90 degrees fahrenheit (32 degrees Celsius) in these regions, sales showed a very noticeable improvement. Even a warm spell now would probably come too late to save this selling season. The good news is that it is hard to imagine the weather getting much worse and depressing revenues even more.
This week should prove more interesting with consumer and producer prices, retail sales, industrial production, and housing starts. My guess is that retail sales will continue to disappoint while industrial production shows some improvement. I am hopeful, but not completely confident, that initial unemployment claims remain under 600,000 when reported on Thursday.
